New venture capital funds in Latin America have brought fresh perspectives and innovative business models to our community. These funds include Latitud, Amplifica, Gilgamesh, and Rali_cap, among others. They all started with less than $15M in commitments, and despite the relatively small size, are having an outsized impact on the region.
Compared to the older funds in the region, they offer startup founders broader support networks, quicker checks, and more relevant sector expertise – a global trend amongst emerging fund managers, who tend to be former founders or operators themselves.
Importantly, these funds have also reached previously untapped investors, adding individuals and institutions from outside Latin America. This serves to broaden the capital base of venture capital in Latin America and further attract new investors to the region.
Why we need to support emerging managers
These success stories show the potential of emerging managers in Latin America and their crucial role in building a dynamic, vibrant ecosystem. Emerging fund managers typically work their way up by building strong relationships to startup founders and are deeply involved in local startup communities.
We need more of these funds, and we need to celebrate the multiplier effects they create for local startup ecosystems.
The managers of emerging funds tend to be more diverse than those of their more established counterparts, and it is extremely important that we have more women and people from diverse backgrounds starting their own funds, such as Maya Capital, BlackRocks, and Amplifica.
Why? Because then they become the majority stakeholders in the general partnership of funds, which is how generational change occurs. Female venture capitalists are twice as likely to invest in a startup with a female co-founder and three times as likely to invest in a startup with a woman CEO.
Unfortunately, barriers still exist for emerging managers, especially in the more traditional funding paths through multilateral institutions and development banks. Much work needs to be done to build on the leadership of the Inter-American Development Bank and other institutions. Public policy proposals and implementation must be a crucial part of making lasting changes that support emerging managers in the future.
In the meantime, there are some quick wins that fund investors can achieve in order to spur, not detract, emerging managers. Here are some:
Lower barriers to entry
There is a mostly unwritten rule among many traditional limited partners in Latin America that venture capital funds need to be a certain size, typically $20M, in order to be sustainable and successful. This guideline is outdated. The plethora of nano and micro funds globally is enough to discount this rule. Indeed, if one can successfully create a sub-$10M fund in the United States, it begs the question why not in Latin America where cost of living and valuations tend to be so much lower, and smaller checks go a long way.
Unfortunately, the minimum fund size requirement has been adopted by a fund of funds managed by development banks in Latin America and created a barrier for emerging managers. Other obstacles also exist. For example, LAVCA, the Association for Private Capital Investment in Latin America has implemented a minimum of $10M in AUM for new members.
Remove contingent commitments
Many limited partners offer venture capital funds contingent commitments that are only activated once the fund reaches a certain size. Rather than catalyze the fund’s capital raising efforts, this tepid support usually creates a funding house of cards in which multiple commitments pile on top of each other without achieving a fund close; thereby lengthening the capital raising process unnecessarily.
The costs and time of these long fundraising processes are not feasible for many emerging managers and deter many potential venture capitalists from entering the fray.
This dynamic has ripple effects that limited partners should monitor. Venture funds sometimes make soft commitments to startups without having firm commitments from investors, leaving startup founders confused and in the lurch.
The employee pipeline is similarly discouraged as venture funds in the midst of fundraising string along junior employees, projecting salaries based on fund sizes that never materialize.
Reduce pay gaps
Typically, venture capital fund managers are paid multiples of the salaries of junior professionals. At the same time junior professionals of venture capital firms in Latin America have out-sized responsibilities that include sourcing deals, leading due diligence processes, and preparing fundraising documents.
As a recent study indicates, too many young professionals stay at funds and take on increasingly difficult and valuable tasks without seeing a corresponding increase in salary or title, or the opportunity to earn carry (which is generally correlated to rising up the title ranks in the fund). It is important that limited partners ensure that there are fewer disparities between senior and junior professionals, especially in the case of female investment professionals.
Just as we want startup founders to be adequately compensated such that they are incentivized to stay and grow with their startups, we ought to do the same for junior investment professionals at venture capital funds. It is time to start treating them like the emerging managers of the future, by allowing them to grow in their current funds or giving them the resources to branch off and build their own funds.
Some bright spots
One clear success story of emerging funds is 500 Global Luchadores, which recently raised $17M from individual and institutional investors including the IDB Lab. The 500 Luchadores team is hard-working, diverse, and unifying. It is also made up of very experienced, yet relatively young investors with deep connections to startup founders. They just finished up the 16th batch of their accelerator program and most of the team has worked together in the trenches alongside founders across multiple batches.
We have also seen a number of women take on senior roles within established venture funds over the last few years, both by being promoted internally and making a lateral move into the fund.
Examples of the former would be Antonia Rojas and Jimena Pardo (separately) joining ALLVP as Partners and Lauren Morton joining QED as a Partner. Paula Giraldo being named a Partner at Deetken Impact (formerly Adobe Capital) and Sofia Garrido being promoted to Vice President at General Atlantic, are examples of the latter. Let’s celebrate these advances as important steps towards changing the face of who is making investment decisions.
These instances are currently the exception, but they should be the rule. Ultimately, by encouraging more emerging funds, we will build a more inclusive, vibrant venture capital industry in Latin America, with both startups and the society at large as the key beneficiaries.